PRODUCT DEVELOPMENTCAS Ratemaking Seminar, Tampa

March 8, 2002

Kevin E. KelsoVice President of State Operations

Farmers Insurance Group

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Industries are converging to support people’s activities

Credit

Banking

Investmentmanagement

Insurance

Larry Keeley -- Doblin Group

www.doblin.com

10 types of innovation

1. Business modelHow you get paid

2. NetworkingHow you structure ownership.

Finance

3. Core processHow you add value to what you offer

4. Enabling processHow you support the core processes

5. Product performanceHow you design your core offering

6. Product systemHow you enhance your core offering

7. ServiceHow you stay connected with customers after purchase.

8. ChannelHow you get your offering to market

9. BrandHow you communicate the offering

10. Customer experienceHow you integrate the entire customer relationship

Process. Offering Delivery

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Emerging standards, specialization

e.g. PowerPC (IBM, Motorola, Apple), Zero inventory assembly

Flexible financing e.g. FreePC, Gateway Your: )ware, Compaq leasing

Networked organizations

e.g. Dell paperless purchasing, Intra/Extranets

Low-cost home PC’s

e.g. Windows 95, Intel Celeron

Technology-driven multimedia enhancements

e.g. Intel 486, Windows 3.0, Adobe Postscript

Going direct e.g. Dell, Gateway Country Stores

Innovation landscape: Non-life insurance

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IT integration allows bundled services

- Zurich Technology Risk Services

- Cigna solutions and XL Risk solutions

IT systems speed service and lower costs

- Progressive's immediate response system

- CT Mutual One Image paperless electronic forms

Alliances open new markets and channels

- car insurance through Thailand 7-11Technology increasing direct channels

First wave of consolidation for efficiencies of scale and global scope

New channels reinvent the industry and make it more efficient

- Direct Line bypasses the agent and sells by telephone

Comparing three sectors...Non-life insurance

Diversified financials

Securities

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Larry Keeley -- Doblin GroupObservations on Innovation

• Target the White Space

• Cross multiple dimensions

• Innovation can be systematized

Truly new products are rare

“What is originality? Undetected plagiarism.”

--Dean William R. Inge

Types of Product Development

• Coverage changes

• Product combinations

• Unbundling coverage/service

• New pricing approach

• Additional services

• Entirely new product

Sources of Development Ideas

• Competitors

• Distributors

• Customers

• Exclusions in current policies

• Alliance partners

• Serendipity (aka dumb luck)

Multi-disciplinary process

• Claims

• Underwriting

• Policy Processing

• Marketing

• Distribution

• Systems

• Billing

• Accounting

• Legal

• Pricing

What is the Actuary’s role?

• Could be anything, including team leader

• Minimum:– Consider ALL costs in setting rates– Compare with pricing of similar products

within and outside your company– Ensure data will be available to measure

performance– Understand the full context of the product

Because...

“Pricing done in a vacuum usually sucks.”

-- Kevin E. Kelso

Claims Hot Issues

• Is special expertise needed to handle new kind of claims?– Does company have this expertise?

– Should you outsource, specialize internally, or train everyone?

• Will adjusters have access to coverage information at time of loss?

Distribution Hot Issues

• Any special licensing requirements?• Are distributors already selling

similar product? How does yours compare? What about compensation?

• How/when/who will train distributors on new product?

Most new products fail

“I have not failed, I’ve just found 10,000 ways that won’t work.”

--Thomas Alva Edison

How to minimize risk/cost?

• Depends on scope of the change

• For significant development projects:

– Start with PILOT

– Develop clear expectations

– Measure everything

– Evaluate and adjust based on results

Pilot Program

• Single state (preferably file and use!)

• Short duration (90 days)

• Limited distribution

• Mocked-up system/manual processes

Clear Expectations

• Number of customer contacts

• Number of quotes

• Number of sales

• Number of claims/utilizations

THIS IS THE BIGGEST CHALLENGE!

Measure everything!

• Develop in advance method for tracking and reporting on all expectations

• Daily/weekly status reports

• Distributor feedback

• Customer feedback

Enough already!

“I sometimes marvel at the extraordinary docility with which Americans submit to speeches.”

-- Adlai Stevenson